The Mother of All Economic Problems

A distinction people often fail to make is that between a prediction and a forecast. For someone who is, or claims to be, good at making predictions normally does so about very specific occurrences within a short time in the future. Forecasting is a different beast altogether, though it naturally pertains to the future. Forecasting is based on probabilities conditioned on whether or not something happens and it's relative effect on the forecast. For example: If the American consumer is feeling a little cocksure this holiday season, then we may avoid a post-holiday earnings slump in the market and reduce the chance of a double dip recession in 2010. If not, well.... I like to think of this in terms of shapes or forces shaping or forming the conditions under which we will likely be living under as a number of forces already underway impose themselves on human life.

I'd like to pick up where I abruptly left off in the last post on the subject of Peak Oil. Observers of this phenomenon have varied opinions about the impact declining oil production would have on the economy. The range is from a free market juggernaut into renewable energy technology that would fuel further economic growth on the one extreme to a decades-long decline into a post-industrial civilization that resembles more the pre-industrial civilization of our great-grandparents childhood. Whatever the case, nobody would dispute the importance of oil (energy) to economic activity and it's central role in industrial civilization. You could reduce these wildly divergent views to a continuum of the effects technology has on economic prosperity on one side and the role and nature of energy as a precondition for technological capacity on the other. To put it more simply, you could ask whether or not machine technology as we have today would be possible without fossil fuels. Are there replacement fuels we can harness from nature that could enable continued industrial prosperity? If indeed the peak of oil production has occurred then we shall find out sooner rather than later.

A way to peer into the madhouse of future narratives is to consider the energy side of the continuum and look at alternatives. The most developed alternative energy sources are by far wind and solar and to a lesser extent geothermal. Others, such as those used to make liquid fuels, like cellulosic ethanol or biogas, are not very close to marketable scale and quite possibly, won't ever be for reasons I'll get to in a moment. So the most promising replacements produce only electricity. This is useful to replace coal, the leading greenhouse gas emitter, but it won't do to run our cars on any time soon.

The global economy has just recently suffered the most serious downturn since the Great Depression and the prospects of a full recovery look shaky at best, especially since the de facto default of the Dubai World fund announced on Thursday. Whatever happens with this is certainly up for debate, but it brings up the relationship between energy and money. I've talked a little bit about this subject before, but I want to introduce some new observations that should be kept in mind. One immediate effect of the announcement was a significant drop in the price of oil. Probably, though I don't know for sure the most salient causes, the price fell for either or both of the following reasons. The first is that there was some need to raise money by some major party to pay off a contract that was hedged against an oil contract. The other is that, in the panic that followed Dubai's default, the perception reigned that the global economy would suffer, thus reducing demand for oil, in which case the price will drop.

I bring this up because it leads to a paper by a physicist who linked economic growth to energy consumption. The paper claims that all growth is directly and unremittingly tied to energy use by that economy. He even put a number on it: 9.97 watts of energy per 1990 constant dollar. This has yet to be peer reviewed so the question of it's accuracy or utility has to be determined, but it quantifies what many of those who believe that the peaking of oil production will be disasterous for the economy. If this idea holds up, it would be a simple matter to do pretty accurate calculations on how the economy will perform in a reduced energy scenario.

If a reduced energy scenario is an inevitable effect of reduced oil production and consumption. One of the concerns I have with a calculation like the one of this physicist is that it makes no distinction between types or sources of energy or the net energy principle. A replacement for oil must have certain shared qualities with oil before we can be certain of maintaining the kind of economic activity we in the U.S. are accustomed to enjoying(?). It must be cheap, portable, and pack an energy punch that can literally move mountains to continue the kind of mining operations and operate all the transportation needs of our economy. This is the kind of challenge the, what I will call, techno-optimists embrace. But sources of energy are at the heart of this problem, and the economic viability of these liquid fuel alternatives are where these things could get derailed.

Looking ahead, then, and to reintroduce the timeline, the declining production of oil could very well be accompanied by a commensurate decline in economic well-being. This need not be disasterous, but the possibilty that it could be disasterous cannot be ruled out. Whether the oil production peak can be definitively declared remains to be seen, but chances are, depending on whether we continue an economic recession, or a depression, we will know for sure within the next five years. To compare, the peaking of global gold production happened eleven years ago and it took until this year for there to be full acknowledgement of the fact by the gold mining industry. People in the oil industry will no doubt behave in a similar fashion, as it is psychologically difficult to admit that the means by which you earn your living has limits. I suspect that the acknowledgement will only come after the production limits are again reached, as they were in 2005-2008, and then there will be another recession.

Next week I will talk about the technology question and some of the forecasts and views of the techno-optimists, the viabilty of these as currently understood, and how the arguments of the Dark Greens foil their optimism. Cheers.

What is the Future?

It is fair to say, judging from the subjects and the tone of my posts, that the nature and predisposition of this blogger is one of doom and gloom. Abandon ye all hope who enters this new epoch of relentless decline and unimaginable suffering, I seem to be saying. Realizing this, and not necessarily disagreeing since I would largely be disagreeing with an imaginary arguer, I think it is time to write on what I think the probable future might hold for us as humans and as Americans. I will devote the next several posts to this.

Despite what some might say, everybody has some capacity to gage what is likely to happen in some measure of time and I believe we do this on a daily basis in some small way. It is a feature of the human mind to do this. Whether or not we get it exactly right is less important than getting it mostly right. This is why the gut feeling can work most of the time for most people since we don't usually demand or require much precision. But this more immediate intuitive sense for events or people needs information from or in addition to experience in order to have any accuracy at all. Babies, for example, don't have any intuition or sense of the future since they lack experience. Adults, on the other hand, and if we're lucky, have an ability to anticipate what someone will do, or what will happen if this or that occurs and therefore has a capacity to foresee outcomes with some degree of accuracy. It is a probability exercise and that is what I want to try to do now.

Probably the first question people ask when considering an issue like global warming, the peaking of global oil production, or economic collapse is "when will it happen?" (That is, if they haven't already decided that it's all a bunch of baloney). But this question is an excellent place to start and forging a rough timeline is a good way to provide a platform for discussion. The next question is, or should be, how do you know things will happen like this? The answer to this question is where all the heavy lifting lies. Because, in order to get at why we, or I, think or believe something is about to happen, we inevitably have to get at what we think is more or less real, and how do we know that.

Plenty of forecasts of various sorts and points of view are out there to be read regarding the impacts of all sorts of things. As I said in my third post, I consider the impacts of climate change, peak oil and other resource limits, and population growth to be the prime shapers the collective future. These are what happen to be the most predictable occurrences, though these too have a range of probability. What is not so easily predicted is the responses, reactions, and behavior of people as these phenomena bear down on them. The ways in which we will understand and experience the impact is through economics, societal shifts/disruptions, and government. People will, in turn, respond in ways that will be formed by whomever they happen to be, with whatever they carry with them, as events unfold. It may be the prime motivation of these blogs to at least inform people enough so that it doesn't come as a shock or surprise as they try to find some way to understand what is happening to the world.

Everything I've said up to now has perhaps been colored with a sense of urgency. I want to elucidate. I believe that there is time to adequately respond to these dilemmas we face. On the other hand, I am not confident we will do so adequately. We have a dual problem. One is of leadership. The other is of followership. The problem each has is the same: Neither is thinking about a future much beyond their own personal futures. Neither is positioned to consider longer term events that are increasingly intractable over time. The consequences of soil erosion, for example, rarely if ever gets mentioned in the media, let alone at the dinner table. And what does get mentioned, such as climate change, is so mired in the politics of ignorance and the election cycle, quarterly revenue reports style thinking that it is effectively kicked down the road or compromised in the meat grinder of Congress so that nothing meaningful comes from any measures taken.

The problem of oil depletion as the peak of global production is reached is the most immediate, most urgent condition we will have to contend with. Personally, I believe that the peak has been reached and we will be faced, from here on out, with declining production. This has indeed been the case since July of 2008. It is still not yet possible to tell for certain whether it has declined for geological reasons due to the mother of all recessions. Oil demand always drops during a recession so it comes as no surprise that production would decline as well. What is telling is that production hasn't grown from 2005 to the present despite increasing demand. That has never happened before. This is what gives me my sense of urgency. No one publicly behaves as though this is, or even might possibly be, the case.

The next post will address the time line of events starting with the oil situation.

International Intrigue

Despite my thoroughgoing rethink of the last two posts in which I sought to conclude the argument to a single, devastating point about our condition, I then read John Michael Greer's The Archdruid Report and saw that he had made the point that eluded me. In "A Gesture from the Invisible Hand" he provides the linkage between the American debt economy, the financialized post seventies pyramid scheme economy that struggles so today, and the peaking of American oil production. And it only took one word, and two readings, to allow me to see what I wanted to write about those two posts. The word is "capital". Primarily, the behavior of capital and what it might look like as energy scarcity becomes the norm for the world economy. You can read it all here: http://thearchdruidreport.blogspot.com/2009/11/gesture-from-invisible-hand.html. This is not the subject I wish to write about as such but what I want to do dovetails nicely off of what he says.

Greer describes the activity of capital in general terms over the decades after the 1972 peak of oil production in America. He is hypothesizing here, but the behavior of money generally is to find the best return on investment. At this point, a sea change occurred in U.S. investment patterns. Our old friend diminishing return on investment comes into play for reasons that capital understands but does not really acknowledge. As the amount of energy needed to acquire energy grows, the less energy there is available for use in the economy. One effect is for energy to become more expensive in monetary terms, but it also makes the financial returns diminish over time because expensive oil causes economic recession. The effect is a disinvestment in productive capacities and infrastrucure. This is a slow process but it has been occurring upwards of four decades. We are seeing now that the Wall Street banks and the financial sector generally are bigger relative to the whole economy and the oil companies, among other sectors, are shrinking, either elatively or absolutely. Capital flees from these investments and the economy as a whole becomes more paper, less production.

That is a very rough sketch, but it serves to bring up the related topic of oil production globally and what we can expect to happen when the inevitable peak is upon us, which it may already be.
And this brings me to the second aspect of my post: A story in The Guardian of London on Nov. 9 which reports on a whistleblower inside the International Energy Agency making the claim that the United States is pressuring the Agency to inflate it's global oil reserves estimates and lowering the rates at which existing oil fields are depleting. Oof. Now, the statements of a whistleblower can be taken as apocryphal as their motives might not be necessarily to reveal the truth. But it just so happens to echo what outside analysts, generally known as "Peak Oilers" have been insisting to be the case within the IEA for quite some time. In addition to this, the Agency has been steadily lowering it's forecasts for global oil production, one of it's central purview's, in it's annual reports over the last couple of years, seeming to legitimaize Peak Olier claims.

The purported reason for this, the IEA's cover-up of the real supply of oil, is because of it's foreseen impact on the oil markets. According to the whistleblower, the IEA feared panic buying of oil by nations and a return to the prices we saw in 2008. And so they should be afraid, because that is surely what would happen, And the United States, by far the most dependant on cheap oil of any nation (though not by any means the only one), would suffer tremendously as it tries to reflate it's economy in the midst of the worst recession since World War II. It's no mystery what an oil price in the range of what we saw in 2008 would do to the efforts by policymakers to patch up the creaking timbers of the American banking system and consumer driven economy: It would destroy those efforts and launch us into a worse recession than the one we are attempting to emerge from currently.

What all this makes me think is that, absent particular circumstances, capitalism is a frail thing. Markets can flourish in good times, but when it's bad, they tend not to get the job done. Assuming for a moment that what this whistleblower says is true, then it speaks volumes about how desperate the U.S. must be to hush inconvenient data. Perhaps it's faith in the market to find the best solution for any and all problems is not so genuinely felt. Seen in another way, it might be that the U.S. may not like the solution the market provides. It may be that the market economy, with it's deservedly touted capacity to command resources like no other system, is not so well suited to handle a situation in which resources are no longer available to be commanded. The implications are profound. The solution may come in a devastating form.

It cannot be exaggerated how critical oil and the other fossil fuels are to industrial economies (and no, we are not in a post-industrial economy). As of this writing, there is no other viable source of energy we can turn to to run them. There is no shadow means of production powered by something other than fossil fuels. Oil is the supreme fuel. Without it, not much else can happen. If we are indeed, as a species, as a civilization, entering the terminal decline phase of oil, then our options become very limited. Gone will be the sense that the future is full of delicious possibilities for human endeavor. We will have to out of necessity think much smaller and much more realistically about what we collectively face. It will be a time to make painful decisions about what is worth preserving of the things we value. We'll have to engage in the art of the possible and dispense with the childish notion that we can do or have anything we want.

To put an historical label on it, I would describe the transition we face as the Age of Abundance meets the Age of Limits. A lot of grief will follow as people are forced to make do with less. If the actions of the U.S. serve to demonstrate the stages of grief, denial being the first, then what happened in the IEA signals where we are better than anything could.

More America the Delusional

The question I asked myself in the last post, and which I had to reconsider the answer, was why is all the debt in the U.S. necessary. I did not ask why do we have it. I asked why is it necessary? A fair response might be: Is it really necessary at all? And I'd say no, not much beyond eating, breathing, and procreating could truly be called necessary. But, if one is an empire looking to continue it's life as one, then eventually debt becomes necessary to meet that end.

As I was writing the original post on Sunday, I found myself falling into the same political argument that the rest of the nation is having. One reason I started writing this blog was to offer a way out of the political gridlock the country is currently experiencing. So rather than dive into the Free-market Austrian school vs. the centralized Keynesian death match, the fruitless freedom vs. socialism clusterfuck, I want to move to a different, more insightful, and critical discussion of what has faced any dominant power in world history and what faces Americans today.

Debt has been the burden that breaks the back of empire throughout history. (I use empire, though you could insert "superpower" or "dominant power" in it's place and it would mean the same thing. I choose to use empire because it has a simpler, classic dimension that puts current events into a broader historical framework.) Inflation is a natural response for debt ladened empires as they seek to cover the increasing costs of their imperial obligations. Typically, as empires are in their expansionary phases, these costs of administering, garrisoning, and legitimizing their rule can be paid for through further expansion. So it has been that the empire puts forth tremendous effort to conquer it's neighbors and the conquered are the ones made to pay for the privilege. However, once the expansionary phase has ended, then the empire has only it's inerior resources to rely on to balance the books. Over time, this becomes harder and harder to do.

A survey of some past empires provides us with examples. Rome, the Spanish Hapsburgs, and the English all underwent clear diminishment of the benefits they received from their imperial holdings as the costs of maintaining empires rose. Mainly, the costs were military, as rebellious subjects had to be suppressed or greedy rivals looked to snatch a land or two away. Military spending is especially inflationary because the money for wars is often borrowed and goes to no economically productive purpose. The debts start to build as it becomes harder to keep all the different parts of the empire in order. There are two basic strategies for dealing with imperial debt. One is to inflate the currency and the other is to tax your citizens. Usually both are employed. So the Roman peasant of 400 CE becomes the disaffected Roman subject unable to meet his own needs and the needs of the imperium. A glance at the Spanish and English colonial empires and the same trend is revealed. Eventually, the system becomes brittle and unable to withstand shocks to it, either from within or without, and collapse occurs.

This is a simple way of introducing complexity. I wrote about this in a previous post so you can refer to that for details on how this happens. I would also recommend Joseph Tainter's "The Collapse of Complex Societies" to get a fuller appreciation of how this operates. Now it's time to apply this to contemporary America in the throes of a debt deflation and ongoing recession/depression as well as in the midst of war and occupation of far away lands.

First, though, a definition of what I mean by collapse. Tainter calls collapse a reduction of a society from a higher to a lower order of complexity. You can look at it as layers of a pyramid, or ovals in a flow chart, and see that the more parts to a system the more complext it is. Simple enough, but each layer added to the pyramid requires an investment of energy by that society in order to solve problems that are unique to it's experience and requires special attention. So a collpase occurs when the highest orders of complexity cannot be maintained anymore and have to be abandoned. Centralized structures decentralize as the gains from the structures are no longer available. This all sounds innocent enough until you look at the population decline of Europe after the fall of Rome, or of Russia after the collapse of the Soviet Union. These are not good times. People die in large numbers.

Now a look at the U.S. situation. What does any of this have to do with the here and now? Isn't America special that way? I will respond in this way: Show me a man living in these above mentioned empires who raised the warning flag about impending collapse and I'll show you a man who was not listened to. If anyone did take note of the diminished fortunes of his empire it was probably quite late in the game. Having said that, I think it would not be controversial to say that 21st century America, the globalized economy it sits at the center of, the administration of it's affairs overseen by countless governmental, non-governmental, or extra-governmental, the size of modern day corporations, the trade arrangements that are the heart of a globalized economy, the technology used in everything from entertainment, medicine, and the military, is the most complex society ever in the entire history of humankind. We have to ask ourselves "how does it all run?" and "how can we ever pay for it?" It seems likely to me that we cannot pay for it. It is why we borrow money from everyone from China to ourselves and from the future. I would pose this question then: Where are we at in the stages of empire? If all empires resort to borrowing at the end of there lives, what are we doing now? What should we be doing?

To finish, I'll say this: The U.S. has been accruing debt for several decades now. It is not doing so because of corruption, though that occurs. It is not doing so because of welfare for poor people. It is not doing so because of bad economic policies, though these have certainly been implemented. It is doing so not because the logic it follows is economic. It does so because it follows the logic of power.

Reality Report interview on the Maximum Power Principle.

http://www.globalpublicmedia.com/nate_hagens_and_the_maximum_power_principle

Overwhelmed by the Subject

The promised post on why debt is necessary for the U.S. economy will have to wait until later. I have run out of wakefulness and still haven't narrowed the subject down to a five paragraph post.